Can you get a student loan with bad credit?

Obtaining a student loan with bad credit can often be challenging, but it is possible. If you have bad credit, federal student loans are a great place to start. Except for federal Direct PLUS loans, student loans provided by the federal government do not involve a credit check.

A good credit score, however, is often necessary when applying for private student loans, which are provided by banks, credit unions and online lenders. Most private lenders require applicants to have a minimum credit score in the mid-600s. Even with private lenders, bad credit doesn’t have to rule you out entirely.

How to get a student loan with bad credit

Qualifying for a private student loan with bad credit can be tough without a co-signer. However, getting a federal loan with bad credit is much easier since most federal loans don’t require a credit check.

Consider federal aid first

Federal student loans should be your first choice when looking into getting a student loan with bad credit. Generally speaking, federal loans don’t require a credit check. As a result, you can qualify for one regardless of whether you have minimal credit history or poor credit.

PLUS loans are the one exception; these loans involve a credit check. However, they’re only looking for an adverse credit history. There are no minimum credit score requirements

Apply for a private student loan

Once you’ve exhausted your federal loan eligibility, consider applying for a private student loan. However, keep in mind that it’s often challenging to get approved for one with bad credit. Unlike federal student loans, most private lenders, such as banks, credit unions and online lenders, require a credit check for private student loans.

If you’re considering a private student loan for bad credit, compare offers from multiple lenders to ensure you get the best interest rate and loan terms possible.

Apply with a co-signer

One way to improve your chances of qualifying for a private student loan with bad credit is to apply with a co-signer — someone who agrees to repay your loan if you can’t make payments. If your co-signer has good credit and stable income, it can even help you secure a lower rate than you would on your own.

That said, make sure your co-signer is aware of the risks before you apply for the loan. If you default on the loan, it can affect your credit and theirs. Plus, co-signing for a loan can increase their debt-to-income (DTI) ratio, making it more difficult for them to qualify for other financial products like auto loans and mortgages.

How to improve your credit before applying for a private student loan

Because your credit plays a key role in the approval process, it’s wise to get your credit score in the best shape possible before applying for a new private student loan. Better credit may improve your approval odds and help you secure better student loan rates and terms when you borrow money.

Here are four steps you can take if you want to improve your credit.

• Check your three credit reports. As you review your credit reports, list any inaccurate information and any negative items you need to address. You can claim a free copy of your three credit reports weekly at AnnualCreditReport.com.
• Dispute credit errors. As many as 34 percent of Americans have found at least one error on their credit report. Some credit reporting mistakes have the potential to damage your credit score. If you discover errors on your credit report, it’s wise to dispute them immediately.
• Lower your credit card utilization. A high balance-to-limit ratio on your credit cards can be bad for your credit score, even if you make your payments on time. You can lower your credit utilization rate (and likely save money in interest) by paying down your credit card balances. A credit limit increase is another out-of-the-box way to help you lower your credit utilization if you can’t afford to pay off all of your balances at once.
• Establish positive credit. Adding new positive accounts might benefit you over time if your credit file is thin. You may want to start with accounts you’re likely to qualify for despite having bad or no credit. Secured credit cards or credit builder loans may be worth considering here.

What to do if you can’t qualify for a student loan

If you’re having difficulty finding student loans because of bad credit, all is not lost. Here are some alternatives to consider.

Income-share agreements

An income-share agreement (ISA) is a student loan alternative that doesn’t require a credit check. Instead of loaning you money based on your credit history, providers will give you funding in exchange for a fixed percentage of your future income — usually between 2 percent and 10 percent — for anywhere between two and 10 years once you start working.

Depending on the agreement and your career results, you may pay more or less than you received. This means you carry some risk, especially if you end up with a high-paying job.

ISAs, which colleges and universities often offer, typically set a salary floor. The salary floor is what your income must be for payments to come due, as well as a payment cap, which is the maximum amount you have to pay.

If you’re considering an ISA, read the fine print and compare the terms to similar options to determine if it’s a good fit for you.

Seek other ways to pay for school

As a rule, it’s best to consider student loans as a last resort for college financing. Research scholarships and grant opportunities at your school first. You can also use scholarship search engines to comb through the millions of scholarships and grants private organizations offer.

If necessary, you may also consider taking some time to work to save up for your next academic year and plan to work part or full time while you attend college. This can be challenging with some degree programs, but it might be worth the effort.

Reduce your expenses

It might be worth considering a less expensive school if you qualify for federal student loans but can’t get enough to meet your financial needs. Community colleges can be a great place to knock out general courses before switching to a four-year university to complete your degree.

You can also look for other ways to cut costs, such as living at home or requesting financial help from your family.

The bottom line

It’s entirely possible to get a student loan with bad credit. Your best bet is to start with federal student loans. But if you need private student loans to help finance your education, bad credit could make borrowing money more difficult and expensive.

Take steps to improve your credit as much as possible before applying for financing, such as lowering your credit utilization ratio and disputing errors on your credit report. If you decide to accept an interest rate that you’re not thrilled about now, you can always refinance your student loans in the future.